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Page 1: Do changes in crude oil price affect economic growth in ... · Do changes in crude oil price affect economic growth in ... crude oil prices Granger cause ... Asymmetric impact of

Do changes in crude oil price affect economic growth in

China and India?

Deimante Norbontaite [email protected] +44(0)7427617878

University of Aberdeen, Kings College, Aberdeen, AB24 3FX

Deimante Norbontaite

5 – variable VAR model is constructed using both linear and non-linear

specifications, based on monthly times series from 1997:06 to 2011:12.

Variables considered for the model are: real GDP, money supply,

inflation, interest rates, and real oil price.

Granger – causality tests are undertaken to examine whether changes in

crude oil prices Granger cause GDP in China and India.

Impulse response functions and variance decomposition analyses are

carried out.

It is a well established fact that oil-importing developing countries

suffer even more through the adverse economic impacts of higher

oil prices than developed OECD countries:

Their economies are more energy intensive

They use energy less efficiently

They are more dependent on imported oil

Sharp increase in the world liquid fuels demand:

2010 87 MMbbl/d

2040 199 MMbbl/d

The potential for rise in liquid fuels demand is focused on the

emerging economies of China, India, and the Middle East.

Therefore, changes in crude oil prices must be of critical

importance to the economy of developing countries.

METHODOLOGY

MOTIVATION MAIN RESULTS

CONCLUSION

Linear model indicates that the world oil price and China’s GDP are significantly positively

correlated. However, oil price does not exhibit any significant effect on India’s GDP.

Neither China’s nor India’s economic growth has a power to influence the world oil price

neither in symmetric nor in asymmetric VAR models.

Asymmetric impact of oil price shocks on China and India’s economic growth – while real oil

price decreases significantly negatively affect China and India’s economic growth, real oil

price increases are found to be insignificant.